Political debate follows growth of Illinois' college savings plan

August 13, 2002|By Janet Kidd Stewart, Tribune staff reporter.

Illinois parents flocking to state-run college savings plans are landing in a firestorm of local politics, spotty oversight and controversial tax policies that is only getting hotter as assets in the plans boom.

Money in the state's Bright Start investment program surpassed $328 million this week in more than 57,000 accounts.

Nationwide, assets in all 529 savings plans (named for the Internal Revenue Service code than created them) will hit $25 billion by year's end, according to Boston-based Cerulli Associates, a research firm, and is expected to jump to $65 billion in another four years.

A new federal tax exemption is fueling the surge, and prompting a wake-up call for state officials and consumers to scrutinize the plans' investment returns and oversight.

That's just what former Chicago Ald. Christopher Cohen tried to do recently when he called Illinois Treasurer Judy Baar Topinka's office to find out why Illinois has only a single provider--Salomon Smith Barney--running Bright Start.

"They said they did it because other states do it this way," said Cohen, a Chicago attorney now in private practice. "And it got more vague from there. When they [confirmed] they have only one vendor, it made my antennae stand up."

He's not alone.

Topinka's political opponents are questioning her appearance in television ads to promote the program that are paid for by Smith Barney as part of an $11 million marketing budget over seven years. Competing providers say the state's new law that taxes gains on out-of-state contributions is a protectionist response in tight budget times that stifles competition for investors. Regulators are even rattling sabers about whether oversight of the blended public-private investment programs is adequate.

And State Rep. Dan Burke (D-Chicago), the original sponsor of the new state law, said he wants to meet with Topinka to discuss adding more providers after hearing complaints from constituents about the way the Illinois program has performed.

"You want some sense of how the investments are being controlled and what kind of oversight is involved," said Jack Joyce, an official with the College Board in New York. "I don't know if those questions are even being asked, let alone answered."

Because 529 plans are state run, the investment plans are regulated by the Municipal Securities Rulemaking Board, which regulates state bond issues. Thus, they are under different advertising standards from those that typical investment firms adhere to in promoting stock investments, for example.

And states have enormous control over the programs.

"No one tells the State of Illinois how to run its business," said Christopher Taylor, executive director of the rulemaking board. He does take exception to those who say advertising goes unchecked, however, saying ads are held to the same standards as bond issuances are.

But the money pouring into the plans is getting attention.

"There's a growing trend of multiple programs within states because states don't want to be restricted," said Joseph Hurley, the guru on 529 plans and founder of savingforcollege.com, a popular Web site that publishes data on state plans. Hurley said about a half-dozen states now offer plans with more than one provider, and more are moving to do so. "States that put roadblocks up reduce consumer choices."

State looks at reciprocal deals

In response to the furor, state officials will "take a look at" recommending some type of reciprocal agreement with competing states that would ease the tax issue, Martin Noven, Topinka's deputy chief of staff, said.

The state already has spiked two poorly performing Smith Barney mutual funds from Bright Start and replaced them with another fund from the same company and one from Boston-based MFS Investments.

Of the seven mutual funds offered in Bright Start, all four equity funds are down for the year to date, not surprising given the poor year this has been for stocks. Of those four, two beat returns compared with similar funds in their categories, and two lagged their peers, according to Morningstar data as of Friday. Looking at three-year returns, two funds ranked in the top quartile, while two rated below.

Among the three Smith Barney bond funds in the plan, one is in the top quartile of performers over three years, according to Morningstar.

Nearly two-thirds of the roughly 57,000 Bright Start accounts are held by Illinois residents, a higher percentage than most other states, which critics suggest is indicative of better plans elsewhere.

In other words, if returns were better, Bright Start would draw in more out-of-state dollars.

State control poses conflicts

Performance isn't the only issue, however.

Critics say that putting state officials in charge of billions of investment dollars is fraught with potential conflicts as they advertise the programs, choose providers and set fees.